Brexit: The potential impact of Brexit on securitization transactions

28 October 2016

Following the vote in the UK referendum on 23 June 2016 to leave the EU, there is some uncertainty as to how this will impact transactions.

We do know that the UK will not leave the EU immediately. This will only happen at the end of the two year process during which the UK may negotiate its withdrawal from the EU, and the arrangements which will apply between the UK and the EU following that. Until then all EU laws continue to apply within the UK. The two year time period for withdrawal from the EU begins when the UK Government formally provides notification of its withdrawal from the EU in accordance with Article 50 of the Treatyon the European Union (TEU). The regulatory impact of Brexit will very much depend on the new relationship that the UK has with the EU, and much remains uncertain at this time, in particular in respect of banks, insurers and funds passporting outward from the UK. Of course, market participants may start to take steps earlier to mitigate the regulatory impact of Brexit.

EU legislation in the UK

EU legislation has been implemented into UK law in a number of different ways. EU legislation which took the form of an EU directive will have been implementedinto UK law by UK Acts of Parliament or UK Statutory Instruments. EU regulations (and level 2 measures such as regulatory and implementing technical standards), onthe other hand, are directly applicable in UK law without domestic implementing legislation and will cease to have effect when the UK leaves the EU, unless laws are transposed into UK law to continue the effect of those EU regulations.

The UK may use continuity legislation to avoid a legal vacuum so that EU rules relating to financial services continue to apply in the UK for the time being post-Brexit. Using this continuity approach would assist in establishing that the UK satisfies “equivalence” standards applicable to some potential post-Brexit arrangements with the EU. Whether by adopting continuity legislation or replacement regulations, the UK, as a G20 participant, is obliged to meet the global standards which set the overall framework for capital markets regulation, through the Financial Stability Board (FSB), the Basel Committee on Banking Supervision (the BCBS) and the International Organisation of Securities Commissions (IOSCO), even after leaving the EU.

In addition, many EU regulations (such as the Market Abuse Regulation (MAR), elements of the European Market Infrastructure Regulation (EMIR) and the Markets in Financial Instruments Regulation (MIFIR, which together, with the directive is known as, MiFID II)) have wide extra-territorial effect and will continue to apply to UK firms irrespective of whether the UK leaves the EU.